By Craig Mellow

German Chancellor Friedrich Merz fulfilled his promise to fire a (relative) fiscal bazooka in a 2026 budget passed last week. Markets shrugged.

Both the iShares MSCI Germany exchange-traded fund and broader European stocks barely budged following the Nov. 28 Bundestag vote, which greenlit a 7% increase in federal spending compared with 2024.

Stimulus of this scope was already in the price, as German equities have jumped nearly 30% this year in dollar terms. "The budget delivered pretty much exactly what the market wanted and expected," says Maximilian Uleer, head of European equity research at Deutsche Bank.

The market might want euros to start rolling out the door sooner. I-dotting within the government and between Berlin and Germany's 16 states will delay actual expenditure to the second half of next year, predicts Carsten Brzeski, global head of macro for ING Research. That's 18 months after Merz outlined a 500 billion euro ($580.5 billion) infrastructure fund and declared "whatever it takes" on military spending.

"We are a federal state, and we love rules," Brzeski explains. He expects 1% gross-domestic-product growth next year, lurching progress after three years of recession and stagnation.

Buying Germany is also far from straightforward for stock investors. The 40 companies on the benchmark DAX index earn just 20% of their revenue domestically, Uleer says. Some familiar names do make it onto Deutsche's list of stocks most likely to get a stimulus boost: Commerzbank, Volkswagen, and Siemens Energy.

Sebastian Schrott, portfolio manager for European equities at T. Rowe Price, is looking outside Germany's borders. Two French construction/engineering firms, SPIE and Compagnie de Saint-Gobain, are poised to scoop up German infrastructure contracts, he thinks. So is the Irish-domiciled builder Kingspan Group.

Merz meeting his spending mark isn't bad news, of course. A quieter subsidy that will halve electricity prices for commercial customers should give a faster boost to beleaguered German industry, Brzeski points out.

The 70-year-old chancellor also seems to have quelled a revolt by younger deputies from his own Christian Democratic Union demanding cost-cutting pension reform. That has put the CDU's governing coalition with the Social Democratic Party on solid political footing, says Mathieu Savary, chief strategist for developed markets at BCA Research. "The coalition is unlikely to fail," he says. "Merz has four years."

External events are also shifting Germany's way, barring a fresh trade offensive from U.S. President Donald Trump, Savary argues. The European Central Bank has cut its key interest rate in half, to 2%, over the past 18 months. That's reviving corporate and consumer borrowing after a long contraction following the 2008-09 global financial crisis. "Merz is lucky," he says. "Germany can do better because the deleveraging of Europe is over."

Better doesn't mean "Germany is back," Brzeski cautions. Slack global energy prices plus Berlin's subsidies may alleviate one shock to its industrial base since Russia's invasion of Ukraine nearly four years ago. Merz has no quick fix for the other: loss of competitiveness to China. "China has become better than Germany when it comes to manufacturing," Brzeski says.

At best, investors' views on Germany and the rest of Europe is sobering up after the euphoria of last spring. "When Merz announced his EUR500 billion infrastructure fund, nobody read the fine print that this was over 10 years," comments Michael Field, European equity strategist at Morningstar. "Germany is a slower burn than we thought."

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December 05, 2025 01:30 ET (06:30 GMT)

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